MCLEAN, VIRGINIA (BLOOMBERG) - Federal Reserve officials are preparing to move faster than their previous round of tightening to keep a high-inflation and near-full-employment economy from overheating, leaving behind the gradualism that marked the central bank's approach in the prior decade.
Prospects for another year of growth above the economy's speed limit, with inflation already high, along with a larger balance sheet that is suppressing longer-term interest rates, "could warrant a potentially faster pace of policy rate normalisation", minutes from the Dec 14-15 Federal Open Market Committee meeting said on Wednesday (Jan 5).
The details of the Fed's pivot towards more aggressively fighting inflation marked a step towards greater urgency and agility - and towards smashing market perceptions that the central bank is losing its grip on surging prices.
It comes after the 5.7 per cent annual increase in the Fed's preferred inflation gauge in November overshot officials' 2 per cent target for the ninth consecutive month, toppling their earlier predictions that prices would moderate as supply chain issues resolved.
Meanwhile, data on Friday is forecast to show that the jobless rate fell in December to a new pandemic low of 4.1 per cent - a figure near what Fed officials view as consistent with maximum employment.
Financial markets interpreted the minutes as unequivocally hawkish. The S&P 500 stock index slumped 1.9 per cent at the close, the biggest drop in more than a month, while yields on 10-year Treasuries rose as high as 1.71 per cent, the loftiest level since April. Traders raised bets on a rate hike as soon as March to around an 80 per cent probability.
While United States central bankers have not yet endorsed those expectations, Fed chair Jerome Powell and other officials are set to address the outlook over the next week, ahead of their Jan 25-26 meeting where they could signal the likelihood of a March rate hike.
Fed officials have yet to give detailed remarks on how they view the impact from surging Covid-19 infections related to the Omicron variant.
Over the past two decades, Fed tightening cycles have been gradual and predictable, starting with the stair-step "measured" pace increases of the 2000s. After the financial crisis, the Fed got off to a slow start as slumping international economies and too-low inflation - combined with an agonising, jobless recovery - warranted caution.
By 2018, however, the central bank was on steady, four-hikes-per-year pace.
"We are used to this highly telegraphed, quarter-point, very predictable (rate cycle)," said Mr Vincent Reinhart, a former head of the Fed's division of monetary affairs. "Now we have an element of catching up, so they want to be seen as nimble."
In practice, he said, that means potentially signalling that one rate hike could soon be followed by another at the subsequent meeting, without fully committing to it, said Mr Reinhart, now the chief economist at Dreyfus and Mellon.
